Jane is a retail and small business writer with a special
interest in emerging companies and entrepreneurs. She covered the
financial services industry before moving into general business
journalism and has written for The Age and The Australian Financial
Review.

Fast Franchises: Survival of the fittest and fairest

For decades, the growth of the franchise sector has been driven by the need to keep people fed and watered. But as the population grows older and rounder, a new trend is emerging – the franchise sector wants you to be fitter, richer and better looking.

BRW’s Fast Franchises has undergone a shake-up as the economic climate pushes aside the growth aspirations of many of the traditional retail franchises and makes way for the expansion of services businesses in the fitness, accounting and beauty sectors.

The 2013 BRW Fast Franchises list features the largest number of service-based companies in its nine-year history. About half the companies on this year’s list (48 per cent) were non-retail companies, compared with 36 per cent in 2010.

Despite the changes and economic pressures, the $131 billion sector fared well over the past year. Revenue for this year’s list of 25 companies totalled $1.56 billion, with company revenue increasing an average of 64 per cent over the three years to June 2012.

LCA says the secret to its success over the past year can be attributed to three factors: the rapidly growing non-invasive cosmetic procedures industry, the diversification of its products and services and its focus on improving its franchising systems and procedures.

The female economy

“The emergence of the female economy is a huge global market opportunity,” LCA managing director Alastair Champion says. “Females now control the majority of household consumer spending [and] … female incomes are projected to increase 38.5 per cent over the next five years.”

A turning point for the company came three years ago when it chose to diversify its products. When a flood of competitors entered the market to provide its main service, laser hair removal, Champion says the business decided to offer additional services such as “injectables”(Botox and cosmetic fillers) as well as treatments for skin complaints such as uneven pigmentation. LCA now claims to be the biggest provider of “injectables” in the country.

“We needed something that was affordable but growing in popularity – injectables is a great space to be in … it accounts for about 25 per cent of our revenue now. We also have return business because it is not permanent,” Champion says.

Other companies in the top five were: Jetts Fitness (ranked No. 1 on the 2012 list) with average turnover growth over the past three years of 219 per cent, Luxottica-owned optometrist and eye wear brand OPSM (143 per cent) and fresh Mex chains Zambrero (135 per cent) and Mad Mex (104 per cent).

Former equities trader Clovis Young explains how he took food outlet Mad Mex to No.6 on the 2013 BRW Fast Franchises list and details his brand’s plans for expansion.

Fitness fast

The fact that two of the top five fastest growing franchises are 24-hour gyms (there are four in total on the list) is no coincidence, PwC national lead partner for franchising Greg Hodson says. Jetts Fitness fell from the top spot in 2012 to No. 2 in 2013, while Anytime Fitness makes its debut on the list at No. 3 .

“The 24-hour gym concept has been a trend in franchising for a few years now and it has really taken off,” Hodson says. “It will be interesting to see if there is any consolidation of that market in the coming years.”

Similarly, the Mexican wave continued with “fresh Mex” franchises Zambrero (ranked 5th), Mad Mex (ranked 6th) and Salsas Fresh Mex Grill (ranked 10th) all sitting within the top 10. Hodson says the “fresh Mex” trend appeals to Australians because it is part of a shift towards healthier fast food options.

According to PwC’s 2012 Franchise Sector Indicator, franchises had growth of 10 per cent – seven percentage points below their own expectations. Supporting BRW’s findings, the report shows that, on average, non-retail franchises were more successful than their retail counterparts. Non-retail groups experienced a 14 per cent rise in revenue compared with retail franchises’ 9 per cent increase.

PwC’s Hodson says franchises generally stand in good stead during tough economic times for four main reasons: proven processes that are easily replicated; support from the franchisor; an aggregation of marketing dollars and the power of numbers (compared with stand-alone small businesses).

“These factors have always meant that franchises have tended to do well in tough economic times,” Hodson says. “Franchisors are also early adaptors of technology and have been using cloud computing for some time, which has also benefited them.”

Recruitment pressure

The major challenges keeping franchisors awake at night last year mainly focused around recruitment – finding the right staff and appropriate new franchisees. Margin pressures were an issue for some franchisors, while the state of the wider economy and sluggish consumer confidence worried others. Increasing property rent and dealing with problem franchisees were also a major concern for many on this year’s list.

When it comes to 2013, the main challenges identified are managing growth, increasing shopping centre rents, more intense competition and finding quality staff and franchisees. But many franchisors are employing new strategies for recruiting franchisees, including offering incentives to own multi-franchise units (more than one franchised outlet), flat or low ongoing franchise fees and changes to the store set-up, such as smaller versions of outlets.

Other companies have turned their focus to recruiting younger, Generation Y, franchisees who have aspirations to build their wealth through owning multiple franchises. Some have deliberately sought migrant families to become franchises.

PwC’s Hodson says “white washing” is a new trend in recruitment where franchisors replicate their business model but allow the look and feel of the outlet to vary from site to site. There are risks and benefits, he says, but franchisors should maintain control over the overall look and operation of the business, he says.

The review, headed by Alan Wein, will analyse the efficacy of changes made to the code in 2008 and again in 2010, giving particular attention to the principle of “good faith” in franchise partner contracts.

Currently, any “good faith”, or value, a franchisee has brought to a business over their time owning the business is not required to be recognised by the franchisor when the contract ends.

However, franchise founders such as Chocolateria San Churro’s (ranked 12) Giro Maurici says he would rather the focus was on what they do best: running their businesses.

“We just really focus on sticking to our knitting with these things,” he says. “These reviews have gone on for the past six years and they are bound to continue.”

Positive outlook

Franchisors are unanimous in their optimism for 2013. All of the respondents to BRW’s survey of finalists said they planned to increase the size of their workforces and 100 per cent of respondents said they expected revenue growth in 2013.

Most expect organic growth, better businesses practices and new products or services to be the main drivers of growth and 90 per cent said they were not looking for outside capital to grow the business. Another contributor to growth is undoubtedly their drive and endless optimism.

“We have a great concept, fantastic product, amazing store design and enthusiastic franchise partners, not to mention a team of dedicated experts who are all passionate about the business,” Chocolateria San Churro’s Maurici says. “The most vital element to our growth was patience – waiting for the best sites and the right franchise partners.”